REPORT TO THE GOVERNING BOARDS OF THE WORKING FAMILIES PARTY AND DATA AND FIELD SERVICES, INC.

Judith S. Kaye

Daniel L. Kurtz

Skadden, Arps, Slate, Meagher & Flom LLP

May 14,2010

I. Introduction

The Working Families Party ("WFP"), a New York political party,

has demonstrated an ability to recruit and organize personnel who conduct door-todoor canvassing and similarly labor-intensive services on a pay-per-shift basis. Some candidates favored by WFP are prepared to pay fees for such services in aid of their campaigns. In February 2007, WFP formed Data and Field Services, Inc. ("DFS"), a New York for-profit corporation. The rationale for creating DFS was to distinguish the fees earned through services to campaigns on the one hand, from the ordinary party contributions to WFP on the other. DFS grew quickly, and in 2009 had revenues of approximately $3 million.

Along with its growing prominence, WFP-and in particular, its relationship with DFS-became the subject of growing scrutiny. On August 9, 2009, City Hall published a "Special Investigative Report" by Edward-Isaac Dovere regarding WFP and DFS. As relevant here, the article raised two primary questions: (1) whether WFP used DFS to conduct financial transactions in a manner that shielded the transactions from public reporting under campaign finance laws; and (2) whether WFP was improperly subsidizing campaigns of favored candidates by providing DFS's services at below-market rates. A number of follow-on media stories brought additional attention to the WFP-DFS relationship.

1

The WFP-DFS relationship also came to the attention of the New

York City Campaign Finance Board ("CFB"), which administers the City's

program of partial public campaign finance and related campaign spending

limitations. On September 2,2009, the CFB made its initial statement on the

WFP-DFS controversy, as follows:

There has been much attention surrounding potential violations of the New York City Campaign Finance Act and Board Rules by campaigns that have hired Data and Field Services, Inc. ("DFS"). The potential violations are twofold: (1) that campaigns are not paying full market value for services; and (2) the potential for nonindependent expenditures due to DFS' close affiliation with the Working Families Party and its affiliates.

Based on information acquired by the Board to date, it is the Board's understanding that DFS exists as an arm of the Working Families Party. Both organizations are located in the same space and share employees; DFS was created by Working Families Party staff; and there are no apparent firewalls between them. In light of the close affiliation, the Board presumes that any activity undertaken by the Working Families Party on behalf of campaigns using DFS as a vendor is non-independent. Therefore, these activities must be reported and accounted for by campaigns as either an in-kind contribution from the Working Families party or an expenditure.

In determining whether expenditures by an outside party are non-independent, the Board applies the factors in Rule 1-08(£). The Board makes no determination regarding violations at this time. Every campaign will be afforded the opportunity to be fully heard regarding potential findings of violation. 1

The factors enumerated in Board Rule 1-08(t) include: "(i) whether the person, political committee, or other entity making the expenditure is also an agent of a candidate; (ii) whether the treasurer of, or other person authorized to accept receipts or make expenditures for, the person, political committee, or other entity making the expenditure is also an agent of

(cant 'd)

2

Amid these developments, on September 22,2009, WFP and DFS

engaged us to conduct an independent review of their respective operations and to

render a report to their governing boards.

II. The Scope and Process of the Review

A. Scope of the Review

Since our engagement, two significant events have occurred.

First, on October 23,2009, Randy Mastro, a former Deputy Mayor

and member of the law firm Gibson Dunn & Crutcher, commenced a lawsuit on

behalf of five Staten Island voters in New York State Supreme Court, Richmond

County, against DFS and the Treasurer of the Debi Rose 4 City Council campaign.

Deborah Rose won a contested primary for the Democratic nomination for a City

(cont'd from previous page)

the candidate; (iii) whether a candidate has authorized, requested, suggested, fostered, or otherwise cooperated in any way in the formation or operation of the person, political committee, or other entity making the expenditure; (iv) whether the person, political committee, or other entity making the expenditure has been established, financed, maintained, or controlled by any of the same persons, political committees, or other entities as those which have established, financed, maintained, or controlled a political committee authorized by the candidate; (v) whether the person, political committee, or other entity making the expenditure and the candidates have each retained, consulted, or otherwise been in communication with the same third party or parties, if the candidate knew or should have known that the candidate's communication or relationship to the third party or parties would inform or result in expenditures to benefit the candidate; and (vi) whether the candidate, any agent of the candidate, or any political committee authorized by the candidate shares or rents space for a campaign-related purpose from the person, political committee, or other entity making the expenditure."

3

Council district and, in the general election was elected to City Council from

Staten Island.

The suit alleged that DFS violated the New York State Election Law

by undercharging the Rose campaign for field services. It was further alleged that

WFP, which was not a party to the lawsuit, transferred funds to DFS and thereby

subsidized DFS' s work for the Rose campaign. According to the lawsuit, DFS

made unreported in-kind contributions to the Rose campaign, in alleged violation

of New York State and New York City limits on corporate contributions. The

plaintiffs sought a court order (I) compelling the Rose campaign to report all

contributions associated with DFS accurately, and (2) barring DFS from providing

further field services for the Rose campaign through election day. Through the

discovery phase of the litigation, DFS produced voluminous documentation. The

Hon. Anthony I. Giacobbe heard one day of testimony. After DFS produced

additional documentation but before testimony resumed, the parties reached a

settlement, which is described in detail below.'

2

The Settlement Agreement recited that "[n]othing contained herein shall be deemed to be a finding of fact or conclusion of law, or an admission ... that there has been a violation of the State Election Law or the New York City Campaign Finance Law."

4

Second, in December 2009, as discovery in the Staten Island litigation

was underway, the United States Attorney for the Southern District of New York

issued subpoenas to WFP, DFS and individual campaigns that had retained DFS.

The scope of our work did not include representation of any individual or entity in

connection with either the Staten Island litigation or the subpoenas issued by the

United States Attorney.

We recognized the need to avoid any interference, or even the

appearance that our work might interfere, with the work of the United States

Attorney. As a result, this Report makes no findings relating to the past conduct of

WFP, DFS or their personnel. Instead, this Report formulates recommendations

that WFP and DFS might consider on a going forward basis. Specifically, our

recommendations concern the WFP-DFS relationship, which was the subject of

both media scrutiny and the Staten Island litigation. We do not address issues

unrelated to DFS raised in the broader media attention devoted to WFP.

B. Process of the Review

Our review relied principally on a series of meetings with the

leadership of WFP and of DFS and review of electronic communications and other

documents requested from them, including the discovery materials produced by

DFS in the Staten Island litigation and the testimony in that case. The materials

that we reviewed were voluminous. We also reviewed public filings with the 5

Board of Elections by WFP and with the CFB by various candidates endorsed by WFP. WFP and DFS have cooperated fully and provided us with all information requested.

III. The Current Relationship Between WFP and DFS

A. WFP and DFS

In 1998, WFP qualified as a "party," as defined under New York

Election Law § 1-104(3), thereby obtaining a ballot line for elections at which New York State voters may cast a ballot. WFP maintains its headquarters at 2 Nevins Street in Brooklyn. As a third party, WFP may endorse a favored candidate who shares the WFP's priorities in a primary election held by one of the two major parties, more often the Democrats. In a general election, WFP may "cross endorse" its favored candidate, who will then appear on both a major party ballot line and the WFP ballot line. Under New York's fusion voting rules a candidate may appear on, and collect his or her vote total from, more than one ballot line. It is generally acknowledged that the influence ofWFP has grown quickly, and was particularly apparent in the 2009 election cycle.

In its limited history, DFS generally has operated as an arm or division of WFP. The focus of DFS is field operations - including canvassing, GOTV (get out the vote efforts), phone-banking and organizing volunteers. In

6

some cases DFS has contracted to provide campaigns with personnel serving

significant roles, such as campaign spokesperson or campaign manager.

DFS has expanded rapidly. In 2009, DFS performed services for

more than 30 campaigns, unions and advocacy groups, and had revenues of

approximately $3 million. The activities of DFS can be divided into six general

categories: (1) services to campaigns for public office in New York City pursuant

to contracts between the campaigns and DFS; (2) services to WFP promoting

WFP's candidates in campaigns not governed by the CFB; (3) services to

campaigns for public office in New Jersey pursuant to contracts between the

campaigns and DFS; (4) year-round low-dollar fundraising for WFP through door-

to-door and street-comer canvassing (a program that also raises the profile of

WFP); (5) services to the Working Families Organization ("WFO"i (primarily

door-to-door and street comer contact with voters) promoting WFO issue

campaigns, such as WFO' s opposition to subway fare hikes; and (6) issue and

electoral work (mostly door-to-door canvassing) for unions, advocacy groups and

campaigns in New York, New Jersey and New Hampshire.

Today, DFS pays approximately 25 personnel on a full-time basis, and

as needed pays temporary personnel who perform canvassing and similar work.

WFO is a nonprofit tax-exempt corporation described in Section 501 (c)(4) of the Internal Revenue Code.

7

Temporary personnel are typically paid weekly. Most personnel are on a payroll managed by ADP. DFS operates out of the same office space in Brooklyn housing the WFP, and pays rent for its portion of the space. DFS uses surplus revenues to fund its growth and has made no distribution of profits. DFS files its own tax returns and issues W-2s to its employees.

Like many new companies experiencing rapid expansion, DFS developed a need for greater attention to administration. Although organized as a for-profit corporation, DFS acknowledges that it generally did not observe corporate formalities until this year. For example, until recently no consideration had been given as to whether or not to issue stock, no directors or officers were appointed, no corporate meetings were conducted and no corporate by-laws were drafted.

Historically, WFP and DFS have shared common financial staff,

which allocates shared expenditures between WFP and DFS (e.g., rent, equipment, supplies and utilities). In its limited history, DFS has made payments for its share of such expenditures from its income stream without a formal schedule. As needed, the financial staff made final year-end reconciliations and adjustments to the respective accounts ofWFP and DFS.

The "Under-Charging" Issue: In New York City, the CFB administers a system of partial public funding of campaigns, with the goal of 8

restraining the influence of large-dollar contributions. In exchange for public

funding, candidates must pledge to cap their campaign spending. For example, a

candidate for City Council may spend no more than $161,000 in the primary

campaign and $161,000 in the general election campaign. If a campaign purchases

services from a vendor, then all payments for those services count toward the

campaign's spending limit. As a result, a campaign could benefit if a vendor

discounted or undercharged for services rendered at below fair market value: The

campaign not only would have more cash on hand but also (perhaps more

importantly) would have more dollars to spend without exceeding its CFB

spending cap.

Under the City Code, one who provides discounted services to a

campaign (other than one who provides services solely on a voluntary basis) is

deemed to have made an in-kind contribution. In the words of the Code, "if goods

or services are provided at less than fair market value, the amount of the resulting

in-kind contribution is the difference between the fair market value of the goods or

services at the time the goods or services are received and the amount charged to

the participant." Rule 1-04(g)(3). More specifically, the Code provides:

Valuation. The participant shall use a reasonable estimate of fair market value in determining the monetary value of an in-kind contribution and shall maintain a receipt or other written record supporting the valuation. "Fair market value" for goods means the price of those goods in the market from which they ordinarily would

9

have been purchased at the time the goods are received. "Fair market value" for services, other than those provided by an unpaid volunteer, means the hourly or piecework charge for the services at a commercially reasonable rate prevailing at the time the services were rendered.

Rule 1-04(g)(2).

The CFB itself furnishes no schedules for fair market value, and has

recognized that the fair market value of a particular service may vary widely. See

Campaign Finance Board, Advisory Opinion 2003-1 (Feb. 11,2003) ("the fair

market value of routine compliance services varies widely"). The CFB also has

recognized that it may be appropriate to account for the cost of using office space,

computers, telephones and other overhead by estimating an hourly or other

periodic rate. Campaign Finance Board, Advisory Opinion 2007-5 (Sep. 6,2007)

("The Board advises the Campaign to pay the Company an hourly rate for the use

of the Company's office space, equipment, and incidental supplies.").

The Disclosure Issue: WFP makes public filings relating to its

sources of revenues and its expenditures with New York State and New York City.

DFS is not required to make such public filings. Critics, therefore, have asserted

that DFS' s operations have shielded efforts on behalf of WFP- favored candidates

from public scrutiny. Notably, the campaigns that retain DFS typically have their

own public reporting obligations that include disclosure of how much has been

paid to DFS.

10

WFP has focused on energizing electoral support for a set of favored policies. Until last year, it had dedicated relatively few resources to corporate governance structures and processes. As described below, the resolution of the Staten Island litigation has coincided with a serious effort on the part of WFP and DFS to improve their corporate governance.

B. The Staten Island Settlement

On February 23, 2010, the parties settled the Staten Island litigation.

The Settlement Agreement provided that DFS would issue a supplemental invoice in the amount of $8,250 to the Rose campaign, which would amend its public financial disclosure reports with the New York State Board of Elections and the CFB. We are advised that DFS has issued the invoice and that the Rose campaign has amended its disclosure reports. In the Settlement Agreement, DFS further agreed to implement reforms in its corporate structure and corporate governance to ensure its adherence to corporate formalities and its operation independently of WFP. DFS undertook these steps, whether or not technically required by law, in order to reach a settlement of the Staten Island litigation and to improve its corporate governance. The steps included the following:

11

• DFS agreed to appoint a sufficient number of independent directors to constitute a majority of its Board of Directors," We are advised that DFS has done so and that the current Board consists of (1) Mr. Jeffrey Dupee; and independent members (2) Professor Frances Fox Piven of the Graduate Center of the City University of New York; (3) Professor James Pope of the Rutgers School of Law; and (4) Mr. Edward Ott. We are advised that the DFS Board has appointed corporate officers, including Mike Boland as Executive Director.

• The Settlement Agreement specifies that the DFS Board "shall have a mandate to implement procedures, best practices and bylaws intended to ensure that DFS is operated in a manner that complies with all applicable state and local campaign finance laws, and is operated independently and not under the control ofWFP." We are advised that the DFS Board has held board meetings, adopted by-laws and determined not to issue stock.

• DFS agreed to establish management, administrative and employment structures that were independent of and not controlled by WFP. In this regard, DFS specifically agreed to analyze its payroll system, financial record keeping, IT department and its full-time administrative staff. We are advised that these steps have been taken, and some aspects are noted below.

• DFS agreed to engage a certified public accounting firm-other than the firm engaged by WFP-to conduct an audit and issue audited financial statements each year. We are advised that DFS took this agreed-upon step by engaging the firm of Condon O'Meara McGinty & Donnelly LLP, which already has begun its work.

4

The term "independent" meant that for the prior two years the Directors were not (i) employed by, a member of, or a contributor to WFP; or (ii) employed by, a member of, or a contributor to any contributor to WFP (excepting candidates who contributed to WFP).

12

• DFS agreed to engage a law firm-other than the firm engaged by WFP-to ensure compliance with all state and local campaign finance laws. We are advised that DFS took this step by engaging the law firm Emery Celli Brinckerhoff & Abady LLP.

• DFS agreed to change its standard contract with campaigns to identify the DFS employees who will perform services, the services to be provided and the charges for them, and estimated hours and shifts. We are advised that DFS has developed such a standard contract.

• DFS agreed to review its practices and procedures to ensure that going forward it will charge fair market value for its services. We are advised that DFS has conducted its review and is implementing such practices and procedures.

• DFS agreed not to provide access to the Voter Access Network, or V AN, to clients before establishing the fair market value of the VAN through an independent expert. We are advised that DFS currently has no plans to provide clients access to the VAN.

IV. Recommendations Going Forward

Implementation of the Staten Island settlement will institutionalize

independence in the respective operations of WFP and DFS. Based upon our

independent review, we believe that consideration by WFP and DFS and their

respective counsel of additional recommendations outlined below will further

promote confidence that WFP and DFS are conducting their affairs transparently

and appropriately. Our recommendations are not meant to imply that any

particular step is now, or was in the past, required by law.

13

1. The Board of Directors of DFS might consider reconstituting

DFS as a taxable, nonprofit corporation. Although a nonprofit

structure is not required by law, the Board might conclude that

the nonprofit form is more consonant with DFS' s goals and

operations. A nonprofit designation, moreover, remains

consistent with the notion of a company charging fair market

value for its goods and services because many nonprofit

organizations charge fair market value in a variety of fields. 5 A

nonprofit designation also may put to rest speculation that DFS

is somehow functioning as a profit-generating arm improperly

funding a political party.

2. Significantly, the concept of "fair market value" has not been

defined with specificity in the City Code or by the courts. Nor

do we find any assistance in practices of other political parties.

The City Code speaks only of documenting a "reasonable

estimate" based on a "commercially reasonable" charge for

In some circumstances, the absence of an intended profit margin may be important in determining a proper calculation of fair market value for purposes of the New York City Campaign Finance Act. Compare NYC Campaign Finance Board, Advisory Opinion No. 2007-5 (Sep. 6,2007) (With regard to a for-profit company, "[t]he fair market value of

(cont'd)

14

services. Rule 1-04(g)(2). Without further controlling

authority, one might reasonably look to any of several methods

of valuation, including (1) an analysis of the firm's own costs

of providing the services on a piecework basis; (2) analysis of

actual comparable market rates offered or charged by similar

firms for similar services, if available; and (3) expert opinions

on prevailing costs and/or market rates. Given that there is no

precise definition of "fair market value," and in order to dispel

any concern that it may be subsidizing campaigns subject to

CFB spending caps, DFS might consider the following steps

when establishing a set of best practices designed to ensure it

charges fair market value for its services to CFB-regulated

campaigns:

(a) We are advised that DFS has conducted an analysis of

historical costs on canvassing services on a per shift basis.

Because the Code speaks of the fair market value of

"piecework," one reasonable approach may be to analyze

(cont'd from previous page)

services for which the Company bills its clients presumably contains a profit element above the out-of-pocket and overhead costs to the Company for providing such services.").

15

fair market value in part by reference to the total costs associated with canvassing shifts performed by DFS employees for CFB-regulated campaigns. It would be an indication that DFS is charging fair market value if DFS can establish that its fees to campaigns recoup its documented per-shift costs.

(b) The next regularly scheduled election cycle for CFBregulated campaigns will be in 2013. In preparation for the next election cycle, DFS might consider whether it is practicable to create standardized schedules setting out the ranges of fees at which it intends to offer its services to clients in each of the several markets where it participates. It is typical for businesses participating in different market segments to charge varying rates depending on the competitive conditions in each segment. Some market segments may allow a business to obtain a premium rate, while in another market segment the same business may risk losing money on a particular assignment in the hope of gaining access or recognition.

16

It is also typical for a business's rates in a particular market segment to vary within some range based upon the outcomes of bargaining with particular customers.

An effort to document standardized schedules reflecting these business realities may assist DFS in creating and maintaining documentation supporting its calculation of fair market value. The various rates at which a business is willing to offer its goods and services is often proprietary information not released generally to the public. By suggesting that DFS consider rate schedules and the documentation of its calculation of fair market value, we do not mean to imply that DFS should consider unwarranted steps to disclose competitive information and thereby undermine its competitive position.

(c) DFS might consider whether to have a written policy that it will not contract to charge a CFB-regulated campaign below DFS' s best estimate of its costs of fulfilling its contract.

17

(d) DFS might consider whether it is feasible to obtain in time for the 2013 election cycle an independent expert opinion as to whether its range of fees to be charged in CFB-regulated campaigns approximates fair market value for the services offered.

3. In CFB-regulated races, the Code provides that a political party's expenditures on behalf of a favored candidate constitute a contribution to the campaign (and, therefore, count toward the campaign's spending limit) if there is "coordination" between the party and the campaign. Although the Supreme Court of the United States has upheld similar federal contribution limits on coordinated party expenditures, see Federal Election

Comm 'n v. Colorado Republican Federal Campaign Comm., 533 U.S. 431,437 (2003), the Court "has recognized that such limits implicate First Amendment interests and that they cannot stand unless they are 'closely drawn' to serve a 'sufficiently important interest,' such as preventing corruption and the appearance of corruption." Davis v. Federal Election Comm 'n, 128 S. Ct. 2759 (2008). The sensitive First Amendment

18

implications warrant particular care in restricting the operations of a political party in the realm of election campaigns. That said, DFS might consider adopting a formalized set of practices that would negate any suggestion that its personnel are involved in coordinated campaign activities on behalf of the WFP. Such practices might include elements of the following examples:

(a) DFS might consider a policy that it will not begin work for a campaign until it has finalized a written contract with the campaign describing the services to be provided and the rates charged.

(b) For CFB-regulated campaigns, DFS might consider whether it is practicable to institute a written policy for individuals on the DFS payroll who join the campaign staff of a candidate pursuant to a DFS contract with the campaign. Such a policy might, for example, (i) require that such individuals will provide services to the campaign only in accordance with the DFS contract and will not volunteer services in their free time to the

19

campaign; and (ii) require that DFS finalize the terms of its contract with the campaign before such persons act on behalf of the campaign in any business dealings with DFS.

(c) With regard to CFB-regulated campaigns, DFS might consider the implementation of a system that will allow all employees to record their time spent on various projects on a daily basis. A uniform time management system might enable the WFP and DFS to document the division of labor among shared employees and allow for effective monitoring.

4. Media coverage of the DFS- WFP relationship occasionally has included allegations that WFP made lump-sum contributions to DFS as a means to allow DFS to charge reduced fees to CFBregulated campaigns. These allegations do not account for the fact that DFS historically has performed substantial fee- forservice work for the WFP, thus requiring payments from WFP to DFS for the services. These allegations are also generally at

20

odds with a criticism that DFS is a profitable arm of the party that somehow generates inappropriate funding for WFP. To

address any such criticism on a going- forward basis, DFS might

consider establishing a set of practices that include elements of

the following:

(a) DFS might consider a voluntary practice of disclosing annually on its web site the amount of fees paid to it by

WFP, together with a narrative description of the types of

services performed for WFP in the preceding 12 months. If feasible, a certification of these disclosures by DFS's outside accountants might be beneficial.

(b) DFS might consider the development of a new or revised

written manual for distribution to its personnel. The new

manual might describe the function of DFS and how its

operations and corporate structure exist independently of

WFP.

( c ) Respecting the details of the formal separation between

DFS and WFP may promote an overall vendor-customer 21

relationship. We are advised that DFS has undertaken a number of measures to underscore its separation from WFP, including a new DFS web site; separate DFS telephone lines; separate DFS email addresses, letterhead and business cards; and new financial recordkeeping procedures for the shared financial staff. DFS should consider documenting these steps and the expected use of these separate facilities in its written policies and procedures. Such policies might also state that when personnel are providing services to a campaign on behalf of DFS, they should identify themselves as DFS personnel.

(d) A shared financial staff historically has serviced both DFS and WFP. Although the finances of the two entities have been distinct, the bookkeeping has typically involved periodic reconciliations. We are advised that the financial staff during 2010 has implemented a system whereby DFS bills the WFP periodically for work on a per-shift basis and obtains periodic payments on a regular

22

schedule. DFS should consider formalizing these practices and making them permanent.

s. We are advised that, with the assistance of its counsel and pursuant to the Staten Island settlement, DFS has formulated a set of standardized contracts that it intends to use in its agreements with campaigns and others who purchase its services. In contracts between DFS and WFP, it might be useful to provide detailed information as to the fees charged by WFP for DFS' s use of WFP resources, including rent, use of computers and telephones, and use of office supplies.

6. As noted above, WFP has relationships with other affiliated organizations, including WFO, a New York corporation exempt from tax as an organization described in § SO I (c)(4) of the Internal Revenue Code (commonly known as a "social welfare organization"). Such organizations may lobby without the limitations placed on IRC § SOl(c)(3) organizations and also may engage in a degree of campaign activity, although such activity may not predominate. IfWFP were to review the

23

relationship between WFP and WFO as well, WFP could adapt a number of the recommendations presented in this Report, as a guide for assuring that WFO and WFP operate consistently with the legally complex rules governing the activities of related organizations of this nature. In approaching such issues, however, one must be mindful that these organizations engage in protected speech and such activities may not be unduly constrained. The Supreme Court decision in Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983), examines these issues in a context which, in some ways, is even more tightly regulated but, nevertheless, reflects the limited nature of the measures required to attain a distinct corporate identity.

24